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Post MiFID Landscape

Date 29/10/2008

Martin Sexton, London Market Systems

The beginning of November 2007 passed like an idyllic rural scene of a swan on an English village pond. Of course, what was not visible was the frantic activity under the water. With an estimated EUR1bn spent on IT, we were witness to another Y2K.

‘MiFID is live, thank God that’s over!’ Not quite. Unlike the Millennium it is not just a one off event. Financial institutions will continue to find the Directive draining resources into the near future as more asset classes and markets come within its scope.

So where do we stand in the new world of MifID?

At the outset there was a great deal of concern about the potential implications of the Directive, which led to the creation of a number of working groups to assess the impact and identify possible solutions to the issues identified.

Sufficient time has now passed to make an assessment of its impact. ‘What were the success stories?’ and ‘Are there challenges that still remain?’

A notable success has been identifying the solution to the question of unique instrument identification. The initial suggestion was to use the ISIN (International Securities Identifying Number) in conjunction with the place of trade (in the form of the ISO 10383 Market Identifier Code or MIC) to uniquely identify all financial instruments. However, given the sheer number and diversity of short-term instruments traded on derivatives markets, the use of the ISIN was found to be inappropriate. After a great deal of heated debate, there was a realisation that this would not be an acceptable solution for the majority of exchanges.

For the most part, transferable securities and some derivative products can be identified by the ISIN and when combined with the exchange code or MIC it is possible to uniquely identify the product. However, with the majority of derivatives and other complex financial instruments, ISINs are not used. In such circumstances an alternative solution was required. This led to the Federation of European Securities Exchanges (FESE) publishing a proposal for the Alternative Instrument Identifier (or AII), comprising a set of six terms: the Venue Identification (the MIC previously discussed), the Exchange Contract Code, Strike Price, Currency Code, Delivery Date, Call/Put or Future Indicator and the Derivative Type. Subsequently, the AII was approved by CESR as being an appropriate alternative to meet the transaction reporting requirements of some derivative markets. When terms are added together the AII results in a unique code, 43 characters in length.

The Alternative Instrument Identifier scheme (AII)




Venue Identification


The four character MIC code (ISO 10383) should be used to identify the execution venue.

Exchange Contract Code


The internal instrument identifier used by a given exchange.

Strike Price


A numeric field, up to 19 characters, with a maximum of 5 decimal places. No decimal point is necessary. The strike price must be expressed in the major currency (e.g. Pounds rather than Pence).

Currency Code


The ISO 4217 3 Alpha digit currency code of the strike price.

Delivery Date



Call/Put Indicator


A single character, the allowed values are:

    C - Call

    P - Put

    F - Future

Derivative Type


A single character, the allowed values are:

    O - Option

    F - Future


Total Size



Each market will be required to report either using the ISIN or the AII for all products on that market. For example, the Borsa Italia will be expected to report using ISINs, whilst LIFFE will be expected to report using the AII. At the time of going to press the ISIN/AII market landscape for derivative exchanges was as follows:

AII/ISIN Derivatives Exchange landscape


Market Operator



Wiener Börse



Euronext Brussels


Czech Republic

Prague Stock Exchange



OMX-Copenhagen Stock Exchange



OMX-Helsinki Stock Exchange



Euronext Paris






European Energy Exchange



Athens Stock Exchange - Derivatives



Budapest Stock Exchange



Iceland Stock Exchange


Italy Borsa

Itaiana lSpA



Euronext Amsterdam



Oslo Borse



Warsaw Stock Exchange



Euronext Lisbon






OXM-Stockholm Stock Exchange


United Kingdom



United Kingdom



United Kingdom

Ice Futures


United Kingdom



A requirement of MiFID was to identify the trading venue and this was achieved by the use of the Market Identification Code (MIC – ISO 10383). This has contributed, in the past year, to the creation of nearly 200 new registered MICs. Though not solely attributable to MiFID, the need to identify specific market by asset class and the inclusion of Multilateral Trading Facilities (MTF) account for the majority of these new creations. Bucking this trend, we find the London Stock Exchange consolidating its two markets XLON and AIMX into one, by removing the Alternate Investment Market MIC. In addition, the aim was to use a MIC of ‘XOFF’ when a transaction is made off-market; and if the instrument is an OTC transaction (e.g. spread bets, CFDs or any non-exchange traded instrument) the MIC of ‘XXXX’ is to be used. Finally, Systematic Internalisers are identified by the Business Entity Identifier (see below).

The close relationship between the ISIN and the CFI (Classification of Financial Instrument – ISO 10962), in that the allocation mechanism of an ISIN is based on the asset classification, resulted in the CFI being included in MiFID for classifying transferable securities. Unfortunately, in its current form it cannot be used to identify derivatives or complex financial instruments (such as composite, hybrid and structured products). A new revision of the CFI attempts to expand the standard’s financial products scope.

To complicate matters regarding the use of the CFI, the Russian regulator (the National Depository Center) has mandated, from July 2008, that all financial instruments traded in Russia and issued by foreign issuers must have an ISIN/CFI pair verifiable by accessing the ANNA Service Bureau (ASB) database. This highlights the weakness of coverage by the current version of the CFI, as there is the risk of products (such as structured products) being classified as plain vanilla products just to meet the Russian requirement of only allowing products classified as equity or debt to be traded. In addition, there are a number of gaps at the country level where CFIs either do not exist or exist but not to the specific granularity required by legislation.

Finding a solution to identifying business entities was trickier than identifying financial products. It was clouded by the need to represent hierarchical relationships such as the actor and the role that counterparty plays. Given this, ISO Working Group 8, responsible for creating the International Business Entity Identifier (IBEI), proposed removing the complexities of hierarchical structures and instead concentrating on obtaining market consensus on the format of the IBEI and the mechanism to support its use.

IBEI ISO 16372

Adding hierarchical relationships is perceived as being a vendor's or an institution's value-add.

Unfortunately, the ISO IBEI Committee Draft was rejected. However, it is understood that certain countries have created identifiers based on the draft version of the standard, namely Belgium, France, Luxembourg, Germany, Switzerland and Austria. The aim is to restart the ISO Working Group with a ‘call for experts’, therefore watch this space.

As an interim solution for business entity identification, the ISO 9362 Bank Identifier Code (BIC) was used. However, as predicted, this has been found not to be workable given that there is not always a one-to-one relationship between business entities and BICs, with some firms using one BIC to cover multiple entities whilst others assign more than one BIC to the same entity.

From a cross-jurisdiction perspective, the implementation of passport mechanisms aims to ensure that firms can provide services to customers in other EU member states, regulated by their ‘home state’. However, with the different reporting requirements of the regulators, the issue of cross-border reconciliation remains.

From a client classification perspective, MiFID identified three categories of client – retail, professional and eligible counterparty (ECP) – with higher protection being given to the less experienced retail clients than the more sophisticated investors at the professional and ECP end. To make the task of client classification more interesting, the classifications are based on a trade by trade basis.

With a number of countries still to implement the Directive and with the future inclusion of non-equities, including commodity derivatives, MiFID will be a fixture on most companies’ programmes for the near future. Another issue equally important is that of potential conflicts between MiFID and other regulations, such as the Basel 2, UCITS and Market Abuse Directive (MAD) to name just a few.

In reality, the Directive will not be fully tested until a major event occurs that falls within its remit.

The village pond is like to remain murky for some time to come until all the regulators comply with MiFID, and a standard consistent set of terms is adopted to ensure cross-border reconciliation. Of course, it is only a matter of time before the creases are ironed out. Nevertheless, it is likely to be a bumpy journey if regulators (inside and outside the EU) keep putting obstacles in the path without considering the bigger picture.

Martin Sexton can be contacted at